"The Fires are Becoming More Frequent and More Serious"

Michael Spence:

The Bailout: Yea or Nay, Michael Spence: We are dealing with risk and risk reduction. No one would reasonably argue that a credit lockup of extended duration will definitely occur absent the bill. The Treasury and the Federal Reserve have been, in the view of many including me, an extraordinarily effective fire department. But the fires are becoming more frequent and more serious. The risk of a credit lockup with a huge amount of collateral damage has risen.

The bill if passed and implemented skillfully will reduce the risk substantially, but not eliminate it. The risk reduction will occur in part when the bill passes because of the intention to act and more substantially over time as the treasury and its appointed agents buy damaged, hard to value mortgage related assets injecting capital into the system. They will also be able to reset the mortgage terms, helping homeowners and avoiding an inefficient foreclosure process in some cases. Experts like Warren Buffet and Bill Gross have stated that they believe that with skillful implementation, the program could not only have the desired effect but produce a decent return on investment. This is hard for Congress and the Presidential Candidates. People are understandably angry and confused. The leadership from the Administration and the Congress and the Federal Reserve, in these very risky conditions has in my judgment been exemplary.

After Lehman, the phrase "extraordinary effective fire department" as it relates to the Treasury doesn't quit ring true. Nor does the last sentence. Exemplary? But I hope he's right about the substantial reduction in risk if the bailout plan is implemented.

Comments

[ndd]

Interesting analogy to putting out all fires in the national forests for decades, which led to conditions conducive to huge conflagrations in this decade.

[Reassurance]

From the perspective of crowd psychology, the fact that policy is willing to try to help will reassure the crowd to some extent. However, the continuous reversals in statements gives the impression that they don't really know what they are doing. They go from saying everything is under control to screaming dire emergency in the space of a few days. Large companies also go from saying everything is rosy to declaring bankruptcy overnight. People no longer have confidence in what is being stated. The message changes too fast, and unexpectedly.

From the technical perspective of actually solving the problem, the bailout will buy a bit more time to figure things out, but not solve the core problem by itself.

[Caitlin]

"They go from saying everything is under control to screaming dire emergency in the space of a few days."

And the screaming is loudest whenever the stock market goes down. Which leaves observers out here in the real world thinking that it's all about protecting stock holders and isn't really about credit freezes or Libor or etc.

There are huge strategic questions about whether public funds should be used to prop up stock and housing markets. There are huge practical questions about whether we even have sufficient public funds to do so.

[Reassurance]

"There are huge strategic questions about whether public funds should be used to prop up stock and housing markets."

Because domestic inflation rates are higher than after tax interest rates, citizens fled to inflation hedges. Stocks in the 401k/IRA, and homes in the taxable portfolio. Inflation hedges tend to be volatile, which is very uncomfortable for most people. This discomfort causes many citizens to ask for mandated stability for popular inflation hedges.

[OhNoNotAgain]

My thoughts have been basically the same with regard to this bill - we need to calm things down first before we can proceed with proper action, which is going to take more time than we have to calm things down. So, we're going to have to take a pretty big hit in the pocketbook for being caught off-guard and unprepared. It's the price that we're going to pay for our electoral decisions in 2000 and 2004. Perhaps the one lesson that we can all take away from this is that elections *do* matter, and administrations *can* affect the economy.

[Barry]

"The bill if passed and implemented skillfully will reduce the risk substantially, but not eliminate it. "

I followed the link to learn where this guy is from:

"Economist, Stanford and Hoover"

A StanWhore and HooWhore. Although I guess that 'skillful implementation' *is* possible; the $750 billion probably would be stolen far, far faster than $750 billion has ever been stolen before.

[Ken Houghton]

To post the moderate version of Barry's comment:

"The bill if passed and implemented skillfully will reduce the risk substantially..."

and there is ZERO chance of that happening, as Hank Paulson has already said.

Urge your Congressman to vote NO. The "populists" have been right all along.

[don]

ndd and Caitlin:
exactly.

[Chris]

When citing others in an attempt to bolster one's credibility, it helps to the other's names correct. It is Buffett. The letter T appears twice. A buffet is where one might get a cheap meal.

[ronin]

Experts like Warren Buffet and Bill Gross have stated that they believe that with skillful implementation, the program could not only have the desired effect but produce a decent return on investment.

For whom, one might ask? These people are not exactly disinterested observers.

[Lafayette]

Highly paid nicompoops

Aricle: The leadership from the Administration and the Congress and the Federal Reserve, in these very risky conditions has in my judgment been exemplary.

I beg to differ. This leadership has been blind.

I posted this graphic, from a September 2007 research article undertaken by the IMF, previously here on this forum. It was taken from Inside Mortgage Finance, which touts itself as the "most cited source for mortgage statistics".

The graphic showed visibly, in 2007, the danger of the sub-prime mess as the part non-guaranteed rose significantly. Another graphic, here (from the same article) showed the precipitous increase in subprime foreclosure rates in 2006.

If our Fearless Leaders did not see this tsunami coming, they should have. And, if they were forewarned and did nothing, then they are negligent. Either way, they deserve a reprimand.

Highly paid nicompoops, especially at the Fed and the Treasury. Show 'em the door, start all over, build a competent group of able finance watchers and forecasters.

[Lafayette]

Both regulatory and non-regulatory environments

And, above all, let's have a reward for "whistle blowers" -- people in Washington's Civil Service who have the courage to speak their minds (and be heard publicly/privately) when they see danger.

Of course, this will open up any such forum to cranks. But, for every 100 cranks, maybe we'll get just one brave, intelligent individual willing to tell the emperors that they are stark naked. Power, of any nature, corrupts and absolute power corrupts absolutely.

A better regulatory environment will help, but as the 2004 decision by the SEC indicates (see here), that alone, whilst necessary, is not sufficient.

Can one blame the regulators? When something goes wrong, that is the tendency. But, did they, sitting on Wall Street, see the forest from the trees? In 2004, did they see that increased borrowing to buy toxic waste would spark the Great Credit Seizure of 2008.

Foreseeing such is never evident, in any business. Anyway, clearly, their decision to relax asset requirements to borrow was a key factor in burgeoning the subprime mess.